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Hedging and Value in the U.S. Airline Industry

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Listed:
  • David A. Carter
  • Daniel A. Rogers
  • Betty J. Simkins

Abstract

This article discusses the findings and practical import of the authors' study of the fuel hedging activity of 28 U.S. airlines during the period 1992-2003. The aim of the study was to answer the following question: Does fuel hedging add value to the airlines and, if so, how? The airline industry provides a natural experiment for investigating the relation between hedging and value for a number of reasons: (1) the industry is by and large competitive and remarkably homogeneous; (2) airlines are exposed to a single, volatile input commodity-jet fuel-that represents a major economic expense for all competitors; and (3) fuel price increases cannot be easily passed through to customers because of competitive pressures in the industry. 2006 Morgan Stanley.

Suggested Citation

  • David A. Carter & Daniel A. Rogers & Betty J. Simkins, 2006. "Hedging and Value in the U.S. Airline Industry," Journal of Applied Corporate Finance, Morgan Stanley, vol. 18(4), pages 21-33.
  • Handle: RePEc:bla:jacrfn:v:18:y:2006:i:4:p:21-33
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    Cited by:

    1. Olivier J. Blanchard & Jordi Galí, 2007. "The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s so different from the 1970s?," NBER Chapters,in: International Dimensions of Monetary Policy, pages 373-421 National Bureau of Economic Research, Inc.
    2. Olivier J. Blanchard & Jordi Gali, 2007. "The Macroeconomic Effects of Oil Shocks: Why are the 2000s So Different from the 1970s?," NBER Working Papers 13368, National Bureau of Economic Research, Inc.
    3. Rampini, Adriano A. & Sufi, Amir & Viswanathan, S., 2014. "Dynamic risk management," Journal of Financial Economics, Elsevier, vol. 111(2), pages 271-296.
    4. Roll, Richard & Schwartz, Eduardo & Subrahmanyam, Avanidhar, 2009. "Options trading activity and firm valuation," Journal of Financial Economics, Elsevier, vol. 94(3), pages 345-360, December.
    5. Liu, Peng & Lu, Xiaomeng & Tang, Ke, 2012. "The determinants of homebuilder stock price exposure to lumber: Production cost versus housing demand," Journal of Housing Economics, Elsevier, vol. 21(3), pages 211-222.
    6. Rountree, Brian & Weston, James P. & Allayannis, George, 2008. "Do investors value smooth performance?," Journal of Financial Economics, Elsevier, vol. 90(3), pages 237-251, December.
    7. Madowitz, M. & Novan, K., 2013. "Gasoline taxes and revenue volatility: An application to California," Energy Policy, Elsevier, vol. 59(C), pages 663-673.
    8. Anh Duc Ngo & Oscar Varela, 2012. "Earnings smoothing and the underpricing of seasoned equity offerings," Managerial Finance, Emerald Group Publishing, vol. 38(9), pages 833-859, August.
    9. :Sohnke Bartram & Gregory Brown & Jennifer S. Conrad, 2009. "The Effects of Derivatives on Firm Risk Value," Working Papers wpn09-01, Warwick Business School, Finance Group.
    10. Adams, Zeno & Gerner, Mathias, 2012. "Cross hedging jet-fuel price exposure," Energy Economics, Elsevier, vol. 34(5), pages 1301-1309.

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